BALANCE OF PAYMENT
Statement of systematic record of all economic transactions between one country (resident
country) and the rest of the world
Arise due to flow of goods
Flow of services
Flow of investment
Period of time- usually a year
Includes current and capital transaction
Characteristics
Way of listing receipts and payments in the international transaction of a country
Adopts double entry book-keeping method
Two sides debit and credit- payments are recorded on debit side, receipts on credit side
Debit and credit of BOP do not balance; balance is achieved by adding item called errors and
omissions
Contains two sets of accounts
Current account- records real and short term transaction
Capital account- records financial and long-term transaction
Current Account
Shows the flow of real income or foreign exchange transactions on account of trade of goods and
invisibles
Divided into two parts: BOT, Balance of Invisible
Balance of Trade account: transaction related to goods (exported & imported) are
entered
Also called visible items or merchandise items e.g. export of tea, import of Petroleum
BOT – positive
Surplus- exports are higher than imports Negative
Deficit- imports are higher than exports
Balanced- imports and exports are equal
Invisible Account
Services
Rendered through or received from the rest of the world
Includes transactions related to services rendered and received by the residents of nation
E.g. Banking & insurance charges, interest on loans, tourism etc.
Unilateral Transfers
Unlike export & import where goods are flow in one direction and payment flow in other
direction
Called unilateral transaction because they represent the flow of funds only in one direction
Includes
Gifts and charity
Grants from abroad
Pension
Remittances
Investment Income
Includes Interest, dividend, repayment of commercial credits etc.
Non-Monetary Movement of Gold:
Monetary sale and purchase- influence monetary reserves
Non-monetary sale and purchase of gold- shown in current a/c
Capital Account
Records the Flow- Inflow/ Outflow of Capital
Shows flow of foreign loans/ investments and banking funds
Non- debt creating inflows- FDI, Portfolio investment
Debt creating inflows- external assistance, external commercial borrowing, short term
credits, NRI deposits
Required to settle surplus or deficit of current account
It takes place in two ways:
Capital A/c receipts
Capital A/c payments
It includes private balances, balance held on govt. a/c, assistant by international institutional
agencies and specie flow
Two accounts- current and capital necessarily balance in BOP.
Surplus of current a/c must be equal to the deficit in the capital account or vice-versa.
Balanced through adding errors and omissions
Balance of trade and balance of payments
BO trade refers to exports and imports only
Balance of trade= exports of goods- imports of goods
BOP includes BOT, services, buying and selling of gold, capital flows etc. (invisible)
BOT- visible item
BOP- both visible and invisible
Equilibrium & disequilibrium of balance of payment
Types of disequilibrium in BOP
Cyclical disequilibrium:
Occurs on account of trade cycle
Structural disequilibrium
Short run disequilibrium
Long run disequilibrium
